India's Recapitalization Plan May Not Be Enough To Meet Public Sector Banks' Capital ShortfallSINGAPORE (Standard & Poor's) Feb. 29, 2016--The Indian government's proposed recapitalization for public sector banks is unlikely to be enough to meet the capital shortfall of these banks, Standard & Poor's Ratings Services said today. In the budget for the fiscal year ending March 2017 (fiscal 2017), the Indian government has allocated Indian rupee (INR) 250 billion to recapitalize public sector banks. This amount is unchanged from Project Indradhanush, under which the government had announced that it will infuse INR250 billion into public sector banks in each of fiscals 2016 and 2017, and INR100 billion each in fiscals 2018 and 2019. "We believe Indian public sector banks will find it difficult to meet the 7.625% target Tier 1 equity ratio (including capital conservation buffer) by March 2016. We believe the capital requirement for banks is likely to be much higher than the amount allocated," said Standard & Poor's credit analyst Geeta Chugh. "We estimate that Indian public sector banks need around INR2.3 trillion capital by 2019, and the Reserve Bank of India's recent directive to banks to clean up their balance sheets has preponed that requirement." Of the government's allocated INR250 billion in fiscal 2016, only INR50 billion remains to be infused. "While the quantum of recapitalization announced by the government for fiscal 2017 seems insufficient, the government's reiteration of its commitment of support to public sector banks, including providing more capital, supports their credit profiles," said Ms. Chugh. In the budget statement, the finance minister announced that the government will find the resources if public sector banks require additional capital. He strongly articulated that the government will stand solidly behind these banks. In our view, Indian public sector banks have to rely more on government support for capital infusions because they may find it difficult to raise capital from the equity capital markets, given their currently weak operating performance. In our base case, we expect these banks to raise capital from the government or from government-related entities to meet the minimum capital requirement. We believe many Indian public sector banks are on a weak footing on the capitalization front. On Feb. 16, 2015, we placed our ratings on Indian Overseas Bank, a public sector bank, on CreditWatch with negative implications. We believe the bank's continued losses and lower capital put it at a risk of failing to meet the regulatory minimum capital requirement. On Feb. 16, 2015, we also revised the rating outlook on Bank of India to negative from stable because of a potential deterioration in the bank's asset quality and capitalization. The rating outlook on Syndicate Bank is negative for similar reasons. We could downgrade these banks (or lower their stand-alone credit profiles) if they are unable to raise capital to meet the regulatory minimum requirement, their risk-adjusted capital ratio falls below 5%, or their asset quality deteriorates more than we currently expect. Banks could face multiple-notch downgrades if their capital breaches the minimum regulatory requirement. Standard & Poor's caps the stand-alone credit profile of a bank that breaches the regulatory capital requirement (and is still allowed to continue to operate) at 'ccc+'.We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.Media Contacts:
Tanuja Abhinandan, Mumbai 91 22 3342 1818
tanuja.abhinandan@crisil.com
Jyoti Parmar, Mumbai 91 22 3342 1835
jyoti.parmar@crisil.com
Emi Nakata, Singapore (65) 6216-1193
Emi.nakata@standardandpoors.comAnalyst Contacts:
Geeta Chugh, Mumbai; geeta.chugh@standardandpoors.com
Deepali V Seth Chhabria, Mumbai; deepali.seth@standardandpoors.com
Amit Pandey, Singapore; amit.pandey@standardandpoors.comStandard & Poor's Ratings Services, a part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We have approximately 1.2 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. With nearly 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.
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